Central Bank Sees Huge Dangers, Attempts to Keep the Calm

Coming up we'll hear a fantastic interview with Dr. Chris Martenson of PeakProsperity.com and The Crash Course. Chris gives us his take on why the Federal Reserve failed to follow through on claims they would finally raise interest rates, what they're likely to do in the months ahead, and the effects all this is going to have on the markets, including gold and silver. Don't miss another great interview with Chris Martenson coming up after this week's market update.

Well, after months of prepping the markets for a rate hike, Federal Reserve chair Janet Yellen couldn't muster the will to actually do it. On Thursday, Ms. Yellen announced the Fed would leave the Federal funds rate unchanged near zero.

Janet Yellen: In light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence including some frugal improvement in the labor market to bolster its confidence that inflation will rise to 2% in the medium term.

That's a lot of Fedspeak crammed into 22 seconds. Translating into plain English, the Fed didn't raise rates because it's downright scared about global market gyrations, the continually lousy job market, and even the slightest hint of deflation. Yes, the central bank wants to make absolutely sure the prices of your groceries, your utilities, your healthcare, and most everything else you need are going up. Flat price levels are bad, and declining price levels are absolutely intolerable within the Keynesian worldview of central bankers.

A weaker dollar could go a long way toward jacking up consumer prices. On Thursday, the U.S. Dollar Index dropped 1% as the Fed stood pat on interest rates. The dollar's retreat gave the precious metals markets a bit of a boost, though perhaps not as big of one as gold and silver bugs hoped for.

Gold prices gained just over 1% on Thursday to finish at $1,132 an ounce. As of this Friday morning recording, gold is continuing its move higher and trades at $1,139 for a weekly gain of 2.7%. Turning to silver, prices cleared the $15.00 level on Thursday and currently come in at $15.22 an ounce. The white metal shows a 3.7% advance on the week.

Also on the upswing are platinum, palladium, copper, and crude oil. Crude is up 5% this week to trade at around $47 a barrel. A report released Monday by the Energy Information Administration forecasts that domestic shale oil production will fall for the sixth straight month in October. Many shale projects that came online with oil at $80 or $100 a barrel simply aren't economic with oil prices below $50.

At least some of the conventional oil producers can make money with crude in the $40s. In the base metals and precious metals mining industry, hardly anyone can turn a profit with spot prices as depressed as they are. The longer copper stays below $3.00 a pound and silver below $20 an ounce, the more that mining capacity can be expected to shrink in the months ahead.

Looking ahead to 2016, the Fed may well start getting the higher rates of inflation it wants. The bombed out commodities markets can't keep falling in perpetuity. After all, lower prices serve as a signal for producers to produce less and consumers to consume more. At some point, rising demand and falling supply will force prices higher. Even Fed economists can understand basic supply and demand curves.

We're already seeing demand outstrip supply for most popular silver bullion products, forcing prices for coins to shoot higher in recent weeks. This has occurred even though silver spot prices set in the futures market have barely budged over the past couple months. We continue to monitor premiums and availability on 1,000-ounce bars as an indicator of real physical tightness. 1,000-ounce bars are used for delivery on futures exchanges.

So far, there doesn't seem to be a problem in obtaining these delivery bars. But as investors are lured into buying 1,000 ounce bars by the higher premiums and delivery delays we're seeing on nearly every other size bullion product that could change. If 1,000-ounce bars start carrying sizeable premiums over spot, then the spot price itself will cease to have credibility. The paper silver price will increasingly be seen as phony. And that could spark a “run on the bank” in the futures markets, where physical inventories are sparse.

Again, we're not at that kind of inflection point just yet. But this could absolutely happen if spot prices aren't allowed to rise to sustainable equilibrium levels. This fall should be a very interesting period in the metals markets, especially with a potential government shutdown looming. We'll be briefing you on what you need to know about a government shutdown scenario in the coming week.

Well now, without further delay, let's get right this week's exclusive interview.

Mike Gleason: It is my privilege now to be joined by Dr. Chris Martenson of PeakProsperity.com and the author of the fabulous work called The Crash Course. Chris is a commentator on a range of important topics such as worldwide economic and financial markets,

governmental policy, precious metals and the importance of preparedness among other things. And we're excited to get a chance to talk to him again today. Chris, welcome back. It's always great to have you on. Thanks for joining us.

Chris Martenson: Thank you. It's a real pleasure to be back.

Mike Gleason: To start up here Chris, we literally just have the Fed announcement just a few moments ago as we're speaking here on Thursday afternoon and I guess it could have gone either way, or at least that's where we were led to believe, but at the end of the day they decided to leave the Fed funds rate at zero rather than doing a token 1/4 percent hike for instance. What did you make of the announcement and before we get into the fall out of how the markets are likely to react in the coming weeks and months? Why do you think they made the interest rate decision that they did?

Chris Martenson: Well, they're clearly very scared of the market they've created and they were following world events and they had decided that with the IMF weighing in saying that it if the Fed raised the emerging markets would simply implode and flip into the sea and whatever they were looking at they're very market-driven. At this point in time and of course they've created FrankenMarkets. I think that's what they are reacting to. I was pretty much expecting them to do what I would call a half-pregnant raise. Right now the range was 0 to .25, I thought they might firm that up to just .25 which would have been effective. 13 whopping basis point hike, they didn't do that. They just kept it where it was. It's out of fear.

Mike Gleason: Now everyone will continue watching very closely because many in the market still take the Fed seriously. Do you believe them when they say they may raise rates later this year and continue hiking in the next year even as other central banks across the globe are moving to devalue their currencies? Or will they fail to get off to zero because they don't think the economy can't handle continual increases? What do you expect they'll be doing moving forward to the months ahead?

Chris Martenson: Well we know that the economy can't handle any crisis whatsoever. This would have been a meaningless increase. I thought they were going to do it just for optics. But clearly, they're going to continue to be so called market or event driven. If markets are not at, or hitting new highs or look turbulent or still volatile the Fed won't raise rates. The side message people should get from this is, “Really? Here we are. We're at a place where we can't even entertain the idea of a 1/4 of a basis point of the interest without thinking of somehow going to destroy our financial system and people's livelihood?” It's really a situation where people should be taking the alternative message which is, “This is actually worrisome.”

Mike Gleason: We seem to be getting less and less economic growth or less return on the creation of all of those new dollars and all the new debt. The rate of employment, the percentage of people with a job continuous to fall. Much of what they have accomplished with their interventions and manipulations seems limited to a higher stock prices and home values but even those achievements may be fleeting as a big correction in the market may be coming soon. What are your thoughts on all that in terms of what they've given us to this point? Where do we go from here based on the fact that they don't seem to be able to get off zero?

Chris Martenson: The Fed has effectively destroyed the economy at this point in time. By that I mean an economy depends on consumers and producers doing what they do. And producers have zero incentive right now to invest in their property planned equipment because they can make a lot more money borrowing money at these ultra fictitiously low rates, pouring that back into stock buy-backs, so if they can borrow money at 1% and buy that stock that has a 2% dividend, the CFO would be an idiot not to do that. And they're not idiots, they've been doing that like crazy. But what you're not seeing is anybody really pouring money into R&D or CapEx or things like that. What CapEx we did have was really bumped off by the shale oil story which is where a heavy dose of CapEx is going, that's done for the moment. So what I see here is a whole market that's addicted to speculation and it shouldn't have surprised anybody.

The Romans discovered this when they originally debased their currency. Literally that's where the word comes from, right? They took “base” metals and put it into their silver and gold mixes. When they did that, they found people stopped producing and shopkeepers had less incentives to run those businesses well. They found speculation took over and that's really what we're seeing right now. You look at the markets people like, “Oh! Stocks are high. Bonds are high. There's money flowing everywhere.” What we're really seeing is just a really overt amount of speculation. The Fed hasn't the first clue how they're going to undo that and get us back on a path of true prosperity.

Mike Gleason: Deflationists believe, the Fed will ultimately be powerless to stop and outright default so although it hasn't played out that way for much of the last decade, their argument is starting to get a little more traction right now. Meanwhile, inflation has also see a default coming but expect it to be a stealth default through inflation. They will just keep on pruning. Which camp are you in, how do you see this playing out?

Chris Martenson: For a long time, I was in the “this must end in inflation (camp)”, but a lot of things didn't support that. I think now, I'm firmly in the camp of saying, first we're going to have to see a big deflation some big events that really scares the Fed and allows them to go to phase 2 of this act. Phase 1, print money, give it up to all the banks. Okay. We know what that got us... a lot of speculation, a lot of asset price hikes, but nothing good for the economy. When this deflationary impulse finally arrives, the Fed is going to have to do something, they're going to be very scared.

I think they're going to have to do something which gets money into your hands and my hands. I'm looking for something like a tax rebate that's monetized by the Federal Reserve, maybe a check directly from the Federal Reserve... something that puts money on Main Street's ledger books, not on the big bank's ledger books and then I think we're off to the races. First, the Fed needs some sort of really scary event to give it a political cover, an international cover to be able to do that.

Mike Gleason: I guess that takes us back a few years, Helicopter Ben that's where that statement came from. He was just going to drop money out of helicopters or joked about doing that to actually get it in the hands of Main Street Americans, is that what you're thinking may play out here?

Chris Martenson: Yeah. That's exactly right. If you think about it, what they're hoping to have happened was a normal cycle where if they just dropped interest rates low enough, people in business will just go, “Oh! Look at the low rate of interest. I'll buy a car. I'll buy a house.” That happened to some degree but not nearly enough to justify the efforts that they took and worst to a countervailing forces to that namely, they took money away from savers. So far, all the numbers I've seen says that savers lost about a trillion dollars in interest payments. That's the trillion that savers didn't have to spend. That was a trillion that was directly transferred to the large banking system, the large banking system I now think we can all agree serves its own interest. It took that money, gave itself bonuses, ramped up some stock prices but generally, it didn't do anything for the larger economy.

Here's the main point, the Fed like every central bank has everything hinged on one thing and one thing only, all of these new debt and money printing only makes sense if growth comes back. It hasn't come back, in fact, we're right at stall of speed right now worldwide. China for sure is not at 7%, I think they're at 0%. I think their wings are clipping tree tops right now. And we're seeing super low growth in Europe. We're seeing Japan in recession. United States growth is not nearly sufficient to justify everything that Fed has done. Add it all up, we're seeing central banks just pouring more and more and more liquid fuel into a motor that just doesn't know what to do with it because it's the wrong kind of fuel and they're going to have to get that in my hands, in your hands, not the bank's hands this next time.

Mike Gleason: We've had a continual period here with 0% interest rates and that has resulted in, I guess what you could say a lot of mal-investment and there certainly are ramifications of that type of policy lasting for such a long period of time and no sort of investments being perpetuated through the big banks and so forth. What's going to happen when that comes to an end because if we're getting all this mal-investment and things blow up, it could get bloody, right?

Chris Martenson: Very. And that's what they're afraid of, it could get very bloody. And what I mean by that is if we look at the larger sweep of global credit, the world went from finally accumulating its first $10 trillion in aggregate credit and then it went to 20 and 40 (trillion) and all of that. We're now at $200 trillion of credit or debt standing across the world, not even including underfunded or unfunded liabilities, just debt. When you look at that number, it's extraordinary and that number is up 57 trillion from 2008 as every central bank in the developed world put the pedal for the metal and just gave us everything they could to get us borrowing more. We did that and it didn't give us more growth but we still have the debt. How do you service debt? With future growth. It's really starting to pile up in really awkward way.

What happens, from my point of view, we're in a credit bubble, it really got kicked off in August 15th 1971 with the abandonment of the gold standard. Without that coupling, we were able to borrow everything we wanted seemingly without impact but it always have an impact. It's been delayed but when it comes back, I'm personally looking for about half of the world's global pile of debt has to be written off, somehow. Somebody's going to have to eat those loses. That's the game that at foot right now. We're just trying to answer that one question. Who's going to eat the losses?

Mike Gleason: Given all of that debt that's been create, it just seems inevitable that government bonds which are often sought to be a safe investment or do for a some sort of a day of reckoning. What advice or warning do you have for those bond holders? What should they be thinking about as they're watching events unfold here?

Chris Martenson: You really have to think very carefully... is getting 2% yield off of your Italian 10-year bond investment really worth the risk, why not just get 0% sitting in cash while you sit back and watch how this all resolves. It's very clear that we have a lot of insolvency stalking around out there. There are a lot of countries we could go through and list a name Greece, Italy, Spain, Portugal who cannot possible service their debts. Those debts are going to have to be written down at some point in time. People are going to be looking at big losses 30 cents, 40, 50 maybe more cents on a dollar losses on those things. My advice is, don't chase yield here. Forego a tiny bit of interest income in the interest of safety because right now, when I look at what's happening across the world, what I see is I see emerging markets in deep distress. This is how we normally see things progress at the beginning of a new financial crisis.

It always starts at the outside, works its way in so pay very careful attention if you're holding on to so called core bonds, it matters. Watch what's happening in Brazil. What's happening in Mexico? How about Singapore? Just check these places out and you'll see there's huge amount of emerging market distress. It's not going away anytime soon and that has a very strong chance of spreading closer to the center. Better safe than sorry. That's my advice.

Mike Gleason: The 2008 financial collapse is still rather fresh in people's minds. How do you think the next collapse may compare to that one? Are we going to see it looks similar? Are we going to see it be worse?

Chris Martenson: It will be a lot worse. Certainly, the authorities have learned their lesson. I don't think they would allow another Lehman (Brothers) moment. I don't think they would allow a big company like that to go bust. But they won't be able to prevent it if a country like Greece or some other country goes bust. I think everybody's a little bit more wary when I talk to big money managers, they all have one foot next to the door. Nobody really trusts this market. Trust is lower than it was in 2008. People know how to react. I think, they're going to react by selling first and asking questions later when things get moving. If you look at all the things that were risks in 2008, the things that I counted back then that were important were institutions that were too big to fail so they'd over concentrated risk. We had too many derivatives on the book. Particularly derivatives against things that were basically worthless underneath. We had sovereign debts that were entirely too high. Every single one of those things is now much larger than it was in 2008.

Too big is even bigger. There's a hundred trillion more derivative on the books. The banks have gotten even riskier because they've learned the lesson which is, “I’ll just get bailed out. Let me go crazy this time.’ Really no lessons got learned and now the risks are higher so I'm looking for a worst bursting this time and the biggest bubble that's going to have to burst, the one that's going to do the most damage is this ridiculous faith people have in the omnipotence of the central banks to cure all ills and protect us all from losses.

Mike Gleason: This may sound like a bleak picture to most but this pending collapse and these economic hardships could spell opportunity for those that are positioned properly. Talk about that because throughout history, these tragic economic situations have actually been seized upon by certain folks who position themselves accordingly to really prosper from it, correct?

Chris Martenson: Of course. And great word is because my business partner Adam Taggart and I have just written a book. It's coming out in a month, it's called Prosper! It's about this exact theme which is that this represents an enormous opportunity, it's nothing personal, I don't love to give doom and gloom or sour outcast. This is just a cycle, we go through it for the same reasons people have gone through this boom bust before in the past. We've made more, larger mistakes this time so there's I think more risk this time, but it always represents opportunity and a lot of people are going to experience this next thing as a great period of wealth distruction. Remember I said, “Oh! What if 50% of bonds’ current value got destroyed.” Trust me, most people would experience that like, “Ah! I just got a lot of wealth destroyed.”

So our advice is to say, look, every so often in history, these things have happened where the paper claims just got a little out of hand or a lot out of hand… and if it's a little out of hand, it's just inflation, if it's a lot out of hand it's Zimbabwe or Weimer Germany. In those moments, indeed they write books and say, “Oh! The middle class got their wealth destroyed.’ But if you watch the story carefully, no wealth was destroyed. They were just as many hotels and acres of farmland and street cars on the road before and after the event happened. But who owned them, that changed. We think this is one of the largest periods of wealth transfer that's going to be coming out. Our work is to help people understand that and do at least to position some, hedge your bets but position some of your assets for this idea. That you want to have them on the right side of that wealth transfer line before it become obvious that that's what's happening.

Mike Gleason: Chris, what affect will all of these have on precious metals? It's been a rough ride and some may wonder if it's worth holding gold and silver based on the beating the metals have taken over the last few years. What role are they going to play if events do unfold in the way that we're talking about here?

Chris Martenson: I'll tell you, I love a good mispricing. If you told me, “Chris, here's some numbers 5 years ago.” You sat me down and said, “Look! Here so much gold is flowing from east to west, from US and European vaults going into India and China. And by the way, it's more than a hundred percent of world mine output so that the west is going to have to come up a thousand tonnes to maybe 1,500, maybe 2,000 depending on how you count per year, to make up for that shortfall. We're going to be seeing something in the vicinity of 50 to 70 tonnes per week flying out of the Shanghai Gold Exchange vaults into the hands of probably the hardest firmest hands in the business which is the individual Chinese holder of gold.” And if you said that at the same time, QE3 was really taking foot, QE3 which is $85 billion a month program was going to kick off in 2012. Tell me where you think the price of gold is here in 2015? I would have gotten that dead wrong because from a fundamental standpoint or a logical standpoint, what we're seeing doesn't make sense.

So one of the things I'm tracking as carefully as I can, and the numbers are murky, is really how much gold really is going from here to there? The numbers are staggering and I don't know when that pricing mismatch is going to end but I will tell you this, sooner or later, the west runs out of gold to ship. I don't know if that's in 20 more years or if it's in 10 more minutes but sooner or later, that happens. I know that this can't persist. Something has to be done to correct that and the only mechanism that's legal and free in fair is for prices to rise. So I love where we're at right now in terms of purchasing. I purchase more gold and silver this year. I hadn't for a number of years. I like the prices here a lot.

We're at or below the marginal cost to production for both gold and silver at this point of time for a lot of mines. The time you want to buy anything of course is when you're at or below the cost to production, that's a great time. So I'm a big believer in both for different reasons. I hold gold is insurance against the monetary accident. And silver is a bet on a beautiful industrial future that needs this incredible metal.

Mike Gleason: It certainly would be a welcome sight to metal investors if we do finally get some true price discovery as you're talking about there. I think it is inevitable like you say, it's only a matter of time.

Well Chris, thanks very much for your time and your wonderful insights. We always enjoy talking to you. It's great stuff. And for people who want to know more about your great content and commentary that you put out there at Peak Prosperity, tell them exactly what they'll find when they visit your website and then tell us more about that book you're working on.

Chris Martenson: Thanks. People, if they come to PeakProsperity.com, we've got a whole website and community there where we're talking about everything related to resilience and to explain that, a brief outline of the book is we talk about wealth as existing in multiple forms and how you can build up all these different forms. So money is a form of wealth, but so is your social capital, so is your living capital. If you have a healthy body and maybe a nice garden. There's material capital. There's knowledge capital. Emotional and spiritual capital, very important coming into this periods of turbulence. So these are the kinds of things we discuss and it's really a wonderful community where we try and figure out what's going on... how are we going to position ourselves.

But most importantly, how we're going to enjoy ourselves today in a way that will also leave us resilient and prepared for whatever future comes along. That's what's going to be in the book. That's what the site. Most of it's free. We have a premium service newsletter as well for people who want to know a little more and great video products. The biggest one being The Crash Course, it's a free of course and it explains all the different moving parts that we found into one nice story.

Mike Gleason: Well that was a very eye-opening thing for me when I saw it a number of years ago and one of the reasons we're such big fans of you here. Thanks again for coming on. I really hope we can talk again in the future. All the best to you and your team there.

Chris Martenson: Well, thank you so much. It's been a pleasure being with you today.

Mike Gleason: Well, that would do it for this week. Thanks again to Dr. Chris Martenson of PeakProsperity.com. Be sure to check out the great stuff that Chris and his team have for you there. It's a first rate resource, great practical action items that you and your family can take to make yourselves more self-reliant as Chris was just talking about. And be sure to check out the new book as well, Prosper!

And don't forget to check back here next Friday for our next weekly market wrap podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.

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About Me

Stefan Gleason is president ofMoney Metals Exchange, a national precious metals investment company and news service with over 600,000 readers, 35,000 paid customers, and $120 million in annual sales. He launched the company while president of a national newsletter publishing company dedicated to helping subscribers protect their freedoms, assets, and privacy.